Save Taxes Smartly with Capital Gain Bonds in India

Investing in financial instruments is a great way to augment wealth, but did you know that it can also bring tax benefits? Capital gain bonds are one such option in India. 

These bonds provide a very good alternative for investors wanting to reinvest their capital gains and also want to claim an exemption under Section 54EC of the Income Tax Act. 

So let us now explore capital gain bonds, how they work, their advantages, and how they compare with other bonds in the share market.

What Are Capital Gain Bonds?

Capital gain bonds, also known as 54EC bonds, are offered by government-backed institutions such as the Rural Electrification Corporation (REC) and the National Highways Authority of India (NHAI). 

They are a great form of tax support for anyone who has earned long-term capital gains from selling his property or assets. The maximum investment allowed shall be Rs. 50 lakh in a single financial year.

The minimum maturation period for the bonds is 5 years. These bonds carry a fixed interest rate, usually around 5-6% per annum.

How do Capital Gain Bonds Help in Tax Saving?

Whenever you sell an asset like real estate, gold, or shares, you could be exposed to long-term capital gains tax (LTCG). The tax liability under the LTCG in case of a sale of real estate is 20% after indexation. By investing in capital gain bonds, this tax liability is being deferred, if not avoided.

Key Benefits of Capital Gain Bonds

1. Tax Exemption

This is the main advantage: tax exemption under Section 54EC, which allows the investor to shield capital gains from taxation.

2. Risk

Since they are issued by government-backed entities like NHAI and REC, they are themselves considered low-risk investments.

3. Returns

In contrast to stocks in the market, capital gain bonds will guarantee fixed interest payments and therefore constitute a steady income during the investment tenure.

4. No Market Volatility

Unlike the bonds in the share market which fluctuate according to market conditions, capital gain bonds are steadied against price fluctuation due to any reason in the stock market.

Bonds in Share Market vs. Capital Gain Bonds

While capital gain bonds guarantee comfort in taxation and security, bonds in share market promise liquidity and flexibility. Here is a trivia comparison:

Capital gain bonds enjoy tax relief under Section 54EC, while the bonds in the share market do not offer this tax benefit. In terms of liquidity, capital gain bonds have a lock-in period of five years, whereas bonds in the share market can be traded freely. 

Capital gain bonds are assessed to have low risks as they are issued by government-backed institutions, whereas bonds in the share market can have medium to high risks based on the issuing institution. 

While returns on capital gain bonds stand at a fixed rate of around 5-6% per annum, returns on bonds in the share market are determined purely by market movements. 

Finally, capital gain bonds are issued by government-backed institutions such as NHAI and REC, whereas bonds in the share market are issued by public and private companies.

How to Invest in Capital Gain Bonds?

Investing in capital gain bonds is simple. The following are the steps to be followed:

1. Choose the Issuer

Choose between the authorized issuers including NHAI, REC, PFC (Power Finance Corporation), or IRFC (Indian Railway Finance Corporation).

2. Apply Online or Offline

Apply through banks, financial institutions, or an online application for investment in bonds.

3. Make the Payment

Payment can be made by cheque, demand draft, or online banking.

4. Receive the Bond Certificate

On successful processing, you will receive a bond certificate as proof of investment.

Who Should Invest in Capital Gain Bonds?

Capital gain bonds fit investors who:

Have sold property or assets recently and like to save taxes, Want a safe investment with assured returns? You can put money aside for five years. Otherwise, if higher returns and liquidity are your demands, explore shares or other instruments for investment including mutual funds, equities, or tax-saving fixed deposits.

Conclusion

Capital gain bonds present an intelligent choice for tax-saving purposes for persons having long-term capital gains. They guarantee safety, fixed returns, and also government backing. Although these go through a five-year lock-in period, the aforementioned tax exemption benefits render them a favorable investment option.